Designed to bring a more risk-based approach to the prevention of money laundering and terrorist financing, the Fourth EU Money Laundering Directive (4MLD) is to take effect by the 26 June 2017.

What does the 4MLD change?

The effect of the 4MLD is that firms will need to reinforce their existing risk-based approaches across all aspects of their AML/CTF compliance programmes. The concept is the continued focus of finite risk mitigating resources on the greatest risks and where they will have most impact.

The following risk-mitigation steps are required under the 4MLD:

  • Europe-wide AML and CTF risk assessment:  To help Member States and firms identify and manage money laundering and terrorist financing risks, by June 2017 (and at least every two years thereafter), the European Commission will publish an EU level risk-assessment report. Each Member State will also produce a national risk assessment. The UK has already made a head-start with this by publishing its first National Risk Assessment in October 2015.
  • Third-country equivalence regime: Rather than maintaining a list of ‘equivalent jurisdictions’, the European Commission will identify high risk non-EU countries with strategic deficiencies in their AML/CTF regimes (effectively a ‘blacklist’). Enhanced Due Diligence will be required when firms deal with persons or entities established in these countries. It is likely that firms will need to review and refresh their country risk assessment models to this effect.
  • Simplified and enhanced due diligence: Firms will have more freedom in this area but will need to be able to justify why they have applied the relevant level of due diligence based on their risk assessment of the relationship. We expect that Customer Risk Assessment models used by firms are likely to come under greater supervisory scrutiny.
  • Ownership directories: For the benefit of firms and regulators, member states will need to create a directory of the beneficial owners of corporate entities incorporated in their country. A similar register will be created for express trusts (those trusts with tax implications) and contain the names of settlors, trustees and beneficiaries. This will help firms verify what their clients have told them about their ownership. The UK has already enacted the legislation to bring about the register of ‘persons with significant control’ (PSC) and filings will be required from April 2016.

Beyond the world of client due diligence, there will be a number of other changes:

  • Politically exposed persons (PEPs): will now include domestic individuals. A PEP must remain a PEP in the eyes of a firm for at least a year after they’ve left office, after which a risk-based approach must be taken before they can be de-categorised.
  • Gambling services: AML/CTF requirements will be extended to all gambling services (rather than just casinos) unless, after a risk assessment, a country can show that their non-casino gambling sector is low risk.
  • High Value Dealers: the threshold over which persons accepting cash payments for goods have to conduct customer due diligence has been reduced to €10,000.
  • Estate Agents: whilst estate agents are already within the scope of 3MLD and the UK Money Laundering Regulations, the 4MLD preamble indicates that letting agents could also be included.
  • Tax crimes: are included in the list of crimes relevant to money laundering.
  • Correspondent relationship: definition will be extended beyond ‘traditional’ correspondent interaction to all relationships between two financial/credit institutions, regardless of their purpose.
  • Higher fines: of up to 10% of a firm’s turnover, and up to €5,000,000 for individuals, cease and desist orders and publicly issued reprimands mean firms will be hit harder when they don’t get it right.
  • Financial Intelligence Units (FIUs): the directive includes formal provisions for member states to ensure cooperation between FIUs of all levels, to allow sharing of reported suspicions that funds are the proceeds of criminal activity or are related to terrorist financing.

Update

The UK is making good progress with transposing this directive into UK regulation and FCA guidance.

What should I be doing?

Here are some questions you need to ask yourself:

  • Am I fully compliant with the current regulatory regime? When was our last health check on AML and CTF risk assessments, policies and procedures?
  • Do I sufficiently understand the changes and the relevance of them to my firm? Is my firm impacted by the 4MLD scope changes?
  • What is the impact of including domestic PEPs in my AML programme?
  • How will the change in the correspondent relationship definition affect the management of our relationship with other financial institutions?
  • Do I need to make my firm’s approach more risk-based? If so, how?
  • Are senior management aware of the impact of the directive? Will requests for project funding/resources come as a surprise?
  • Which aspects of my firm’s business might be impacted by resulting policy and/or procedural changes?
  • Which staff in the business, compliance and operations, need to be prepared? Might they need additional training?

Can we help you with this?  Contact us on 0207 620 8440.

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